Who Wins When Commodities Are Weak?

Developed economy central bankers were somewhat lauded before the financial crisis. Recently, though, they’re finding it harder to catch a break. Perhaps you don’t think they deserve one.

In any case economies under their charge responded only very grudgingly to their monetary ministrations for years, and to some extent still do, even if the pace seems to be picking up a bit in continental Europe and, far more obviously, the U.S. and the U.K.

Still, here’s a nice chart from which they might take some solace. Compiled by Barclays Research it shows the gap between headline and core consumer price inflation across Group of Seven nations, superimposed on the International Monetary Fund’s global commodities index. As can be seen at a glance, the correlation is fairly good, showing, as Barclays says, the way commodity prices can act as a ‘tax’ on household spending power.

This chart shows the relationship between inflation in the major developed countries and global commodities

Barclays

During 2004-08, that tax was averaging a hefty 0.8 percentage points a year in the G7, quite a drag on consumption (not that that was necessarily a bad thing, looking back, consumption clearly did OK). However, since 2008. it has averaged just 0.1 percentage points providing some rare relief to the western consumer struggling with, fiscal consolidation, weak wage growth and stubbornly high rates of joblessness.

So, what’s the good news for central bankers here? Well, while a deal with Iran inked in late November to ease oil export sanctions clearly isn’t going to live up to its initial billing, at least in terms of lowering energy prices, commodity-price strength generally is still bumping along at what is clearly a rather weak historical level.

And the consequent very subdued inflation outlook in the U.S. and euro area means that central banks there can continue to fight on just one front, and focus on delivering stronger growth and improved labor market conditions.

Of course, weak inflation expectations can tell us other things too, notably that no one expects a great deal of growth, or upward pressure on wages. Moreover, as we can also see from the chart, the current period of commodity price stability is a pretty rare thing. Perhaps neither central bankers or anyone else should get too used to it.